There are three ways to deal with an auto loan when you’re in default and can’t bring it current. The first and best option is to sell the vehicle and satisfy the loan. The second option is to wait for the lender to repossess the vehicle and the third is to negotiate a voluntary surrender. Although it might not seem like there’s much difference between repossession and voluntary surrender, both the process and the consequences are often much different.
Repossession and voluntary surrender are similar in that both result in losing your vehicle and both actions remain on your credit report for the next seven years. However, in many cases, this is where their similarities end.
The lender is in the driver’s seat with repossession. Some states don’t require that lenders provide any advance notice and no state laws say a lender must tell you when or where the repo will occur. Your vehicle will simply be towed from your home or a public location.
In contrast, a voluntary repossession occurs at a given time and place. A main difference is that this is a proactive response to a bad financial situation. It shows you are taking responsibility instead of forcing the lender to take legal action.
Repossession usually involves an intermediary while a voluntary surrender most often only involves you and the lender. Most lenders contract with a repossession company that charges you, not the lender, to tow your car to a storage lot. You may also be responsible for paying storage costs until the vehicle sells. These costs increase the balance of the loan and are subject to interest. By arranging for a time and place to turn in your car, you can eliminate the agent’s fee, towing expenses and possibly storage costs, potentially saving you hundreds of dollars.
Although the lender will sell your car in both repossession and a voluntary surrender, financial responsibility for a deficiency balance may vary. Although some state laws limit a lender’s rights in collecting a deficiency balance, this is the exception, not the rule. In most states, you remain liable for the outstanding balance of the loan after subtracting sale proceeds and adding repossession costs. With a voluntary surrender, you may be able to negotiate with the lender. For example, a lender might agree to waive its right to collect on the deficiency or agree not to report the default to credit reporting agencies.
